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TMI Blog2013 (7) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... while determining the profits of the Indian establishment. 3. The CIT (A) ought to have held that the entire receipt is from Head Office and, therefore, is not liable to be included for the purpose of profit in India. 4. Without prejudice, to the above, the CIT (A) erred in determining te profit at 10% of the gross amount of receipt from head office without considering the fact that there was no profit element at all and without considering the fact that the appellant suffered loss. 5. Any other ground that may be urged at the time of hearing." 3. Ground Nos. 1 and 5 are general in nature and they do not require any adjudication. 4. In ground Nos. 2,3 and 4, the assessee has challenged the estimation of profit at the rate of 10% of the amount received from Head Office. 5. Briefly the facts are, the assessee is a company incorporated in the year 1995 with its head office at St. Louis, USA. The assessee is also having a branch office in India which commenced its operations during the financial year relevant to the assessment year 2006-07. The assessee is engaged in the business of medical transcription and software development related to health care. The branch in Hyderabad wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a loss. Hence, profit cannot be estimated at the rate of 15% of the expenses in the case of the assessee. The CIT (A) after considering the submissions of the assessee rejected both the contentions with regard to taxability of the income as well as the estimation of profit. So far as taxability of the income is concerned, the CIT (A) held as under:- "6.3 I have considered carefully the above facts and evidence. The first issue is to be considered is whether there is any taxability in India or not. The second issue is with regard to the amount of income which can be considered for taxation. 6.4Coming to the first issue, the appellant has stated that as per the DTAA, while determining the profit any income arising on account of specific services to the head office in USA is not to be considered. It was stated that the appellant was only providing services to the head office as per para 3 of Article 7 of DTAA between India and USA. It is mentioned that in determining the profits of the permanent establishment no account shall be taken for amounts charged for specific services performed by the branch vis-a-vis head office. Therefore, nothing was taxable in India. 6.4.1.I cannot acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endent company in India for a similar software development and medical transcription services should be the determining the factor. The appellant has argued that Wellinx Inc is in loss. Therefore, no income can be taxed in India. I do not find this issue to be at all relevant. Income has to be estimated on the basis of the working of the Indian business. It is not relevant whether Wellinx In, USA is in profit or loss. 6.5.1. Even though rule 10(iii) of income tax rules gives the authority to the Assessing Officer to estimate profits yet the estimation has to be based on specific information and data. GP rates of comparable Indian Companies would help a lot in this calculation. However, I find that the Assessing Officer has not done this exercise at all. 6.5.2. Given the above facts and circumstances, I hold that a 10% of net profit would be just and fair in the case of the appellant. The appellant gets relief accordingly." 7. The learned authorised representative for the assessee referring to the exact nature of activity carried on by the assessee as mentioned in the notes given to audit report submitted that as per the said note the activities performed in India relates to rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for taxation. He further relied upon a decision in case of Societe Generale vs. DDIT (IT) 21 ITR (Trib) 206 wherein it is held that the amounts received from head office by overseas branches are exempt as there cannot be income arising from transactions with self. The learned authorised representative for the assessee contended that the Income-tax Appellate Tribunal held that a branch cannot be treated as a separate entity so far as the transactions between head office and Indian branch are concerned. He also relied upon a decision of Income-tax Appellate Tribunal, Mumbai Bench in case of WNS North America Inc. Vs Asst. DIT (141 ITD 117). 9. The learned Departmental Representative, on the other hand, submitted that there is no dispute to the fact that the assessee is a branch office and is a permanent establishment. As per the definition of Article 5(1) of the Indo-US DTAA, the services rendered by it to the Head Office are a part of commercial activity of Head Office. Further, since the assessee has not provided any basis for computation of income, the Assessing Officer was justified in estimating the profit at the rate of 15% as per Article-7(2) of Indo-US DTAA and Rule 10 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charges (otherwise than toward reimbursement of actual expenses), by the permanent establishment to the head of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know how or other rights or by assessment year of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices." 11. As can be seen from the aforesaid Article extracted hereinabove, it is in two parts. The first part of the aforesaid Article relates to the activity carried on by the branch office which is commercial and business in nature whereas the second part relates to the activities which are not commercial in nature and relates to specific services performed by the branch office. The assessee's contention is that it is rendering services covered by second part, hence the income arising on account of such specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate Tribunal, Mumbai Bench therefore following the decision of Special Bench of the Tribunal in case of ABN Amro Bank NV vs. Asst. DIT 97 ITD 89 (SB) held that the transactions between the head office and branch resulting into interest income or interest expenditure are to be viewed as transaction with self. However, this principle cannot apply to the facts of the assessee's case as there is no transaction of similar nature between the Indian PE and its HO. On the contrary the Indian PE is carrying out a commercial activity outsourced by the HO. The facts in case of WNS Nath American Inc. Vs. Asst. DIT are also totally different. However, it is worth mentioning that the Income-tax Appellate Tribunal Mumbai Bench in the aforesaid decision held that onus is on the assessee to prove that there is no element of profit in the reimbursement received by the assessee. Mere nomenclature of 'reimbursement' is not relevant. The assessee is required to lead evidence to show that the expenses incurred are equal to the amount recovered. The other decision in case of Societe General vs. Dy.DIT (supra) is also factually distinguishable. 14. In aforesaid view of the matter, we do not find any i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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